How far can the Fed go?

Bernanke May Run Low on `Ammunition' for Loans, Rates

Excerpts:

Federal Reserve Chairman Ben S. Bernanke may be running out of room to pump money into the financial markets and cut interest rates to rescue the economy.

The Fed has committed as much as 60 percent of the $709 billion in Treasury securities on its balance sheet to providing liquidity and opened the door to more with yesterday's decision to become a lender of last resort for the biggest Wall Street dealers. The central bank has cut short-term rates by 2.25 percentage points since September and will probably reduce them again tomorrow.

``They're using up their ammunition on the liquidity and overnight interest-rate fronts,'' said Lou Crandall, chief economist at Jersey City, New Jersey-based Wrightson ICAP LLC, a unit of ICAP Plc, the world's largest broker for banks and other financial institutions.

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Opening up lending to firms other than commercial banks represents a shift in the Fed's 94-year history. The so-called primary dealers include firms that are units of commercial banks and several that aren't, including Goldman Sachs Group Inc., Morgan Stanley and Merrill Lynch & Co.

Bernanke is likely to find new ways to do whatever it takes to keep markets running and revive economic growth, Pardee said.

Regarding the Fed's moves so far, ``that shows you how bad the market situation is, and it also raises the question of whether the Fed needs help from Congress or the administration,'' Sack said.


Comment: I have a degree in economics and I don't completely understand how this works (perhaps better to say I have a partial understanding).